FOMC: In no uncertain terms a dovish endorsement

It was a volatile Wednesday before the FOMC meeting, which delivered the expected pushback to March rate cut doves.

( First Take On The FOMC) 

January's gathering was a procurator caucus as officials puzzled over when to commence what the December dot plot suggested would be a trio of so-called "insurance cuts" in 2024 — the issue for stocks is that sentiment was running haughty on the idea of aggressive Fed cuts to the tune of double the Fed dot plot. However, a lengthy string of robust US economic data constantly contradicted market pricing and suggested that the Fed would not need to cut rates beyond insurance cuts. In other words, the Fed might only be willing to cut rates as inflation recedes to avoid passive tightening through the real-rate channel.

Of course, numerous smoke signals suggest inflation may not fall further, in which case even those insurance cuts might not be prudent. Recent data showed that US consumers are still in spendthrift mode, and the advance read on Q4 GDP showed that growth was robust. In the new statement, the Fed described the economy in upbeat and, in no uncertain terms, a dovish endorsement if one was positioned for the start of a Federal Reserve Dovefest.

Two significant points emerge from the statement. Firstly, while the indication suggests that the Federal Reserve's next move will probably be a rate cut, the reference to "any adjustment" implies that the possibility of a rate hike is not entirely dismissed, albeit it would require significant data development to warrant such a move. Secondly, despite the acknowledgment that rate cuts are on the horizon, they are not imminent, given the criterion of "gained greater confidence." This suggests that any rate cuts will be deferred until the Fed is more assured about the inflation trajectory and the overall economic outlook.

The recent inflation data presents a mixed picture, showing some encouraging signs tempered by inconsistencies. While wage growth shows signs of cooling, which could potentially alleviate inflationary pressures in the services sector throughout 2024, core inflation remains stubbornly high.

The persistence of elevated core inflation levels underscores the need for the Federal Reserve to maintain its current monetary policy stance for as long as possible. Despite acknowledging that inflation has eased somewhat over the past year, the Fed's language regarding inflation in the January statement remained unchanged from December.

This suggests that while there may be some moderation in inflationary pressures, the overall level of inflation remains a concern for the Fed. As such, the central bank will likely continue monitoring inflation data closely and adjust its policy accordingly in response to evolving economic conditions and inflation dynamics.

My first take on the FOMC is bearish stocks. However, stock operators will likely fade the move as strong US economic fundamentals have also provided support for earnings growth, which has been crucial for equities, especially amid pressure from rising interest rates. Economic growth is more important for stocks, even more so if 10-year US Treasury Yields remain below 4 %.